China’s economy is starting to slow significantly: QNB

The Chinese economy is already starting to slow significantly although the pandemic shock has been small and short, followed by a rapid recovery for the country, QNB said in an economic commentary.
China has outperformed all major economies for decades, becoming one of the most important growth engines in the world. This pattern of Chinese outperformance continued last year, as the Covid-19 pandemic devastated activity across continents.
In fact, China was the only major economy to show positive GDP growth in 2020, with economic growth of 2.3%, compared to a contraction of 3.5% and 6.5% for the United States and the euro area, respectively.
After posting a strong 18.3% year-on-year result in the first quarter of this year, the Chinese economy decelerated to 7.9% in the second quarter. It is important to note that the slowdown was widespread, including several major components of the economy, such as industrial production, investment and retail sales.
Recent headwinds for the Chinese economy include the new Covid-19 Delta variant and flooding across the country, which have disrupted business activity. Another key element in the deceleration of economic activity has been the gradual withdrawal of stimulus measures by the Chinese authorities.
On the fiscal front, policy has tightened with fewer extraordinary benefits and social transfers as well as more moderate spending and support for public investment. On the monetary side, slower growth in the money supply also indicates a less favorable policy. Despite all the headwinds, QNB does not expect a sharp slowdown in the Chinese economy, beyond the political target of GDP growth of “around 6%”.
Three main factors underpin QNB’s point of view.
First, private consumption should recover more strongly over the next few quarters, promoting a healthy rebalancing of the economy.
While private consumption is expected to remain under pressure in the third quarter of 2021, following a wave of new cases of Covid-19 Delta variants, a rebound is expected at the end of the year and in 2022 as the effect of the pandemic fades.
In addition, the Chinese authorities support the rebalancing of the economy towards consumption and the engagement of the private sector.
Hence, the drivers of growth are expected to shift from public investment in infrastructure to private domestic consumption. In addition, there are excess savings accumulated during the pandemic. The unwinding of savings will also support the growth of private consumption.
Thus, despite weak growth in private consumption in 2020 and a sluggish year 2021, QNB expects private consumption to accelerate and rebound in the coming quarters.
Second, as China’s growth engines evolve, investment by private companies is expected to partially offset the decline in public investment.
As China’s infrastructure is already highly developed and additional public investment in the sector tends to be less efficient, often contributing to insufficient levels of debt and overcapacity, public investment is not a sustainable source. long-term growth. Therefore, they are expected to decrease in the future and be replaced by private investment, particularly in strategic manufacturing ‘frontier sectors’, such as artificial intelligence, quantum computing, semi -conductors, medical technology and space exploration, which includes satellite development and research. This will not only help contain a deeper downturn, but also increase economic productivity in the longer term.
Third, Chinese exports are expected to remain strong, supported by a favorable external environment. After years of total exports ranging between $ 160 billion and $ 220 billion per month, Chinese exports reached a record high of over $ 280 billion in June 2021.
While export growth is expected to moderate over the next few quarters, as the global recovery is likely to peak, the overall level of nominal exports will remain high, as external demand gradually normalizes.
In short, the growth of the Chinese economy is slowing down. However, it should be noted that the Chinese economy has passed its peak with weakening fiscal and monetary stimulus.
As such, QNB considers this current growth path as a normalization, still at high growth levels. He therefore does not expect activity to fall below the growth target of around 6%.
Private consumption, manufacturing investments and exports are expected to support the gradual slowdown of the Chinese economy at a more normal pace. Thus, QNB expects China’s growth of 8.1% in 2021 and 5.5% -6% in 2022 and 2023.

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